Monday, January 2, 2017

Two days ago, in
The
Year in VIX and Volatility (2016), I made no mention whatsoever of the VIX futuresterm
structure. Traders of the full range
of VIX products (futures, options and ETPs) hopefully know by now that the entire
VIX product landscape is based -- and priced -- off of VIX futures and one of the most important
aspects of VIX futures is the shape of the term structure.

Long story
short: as the graphic below shows, the 2016
VIX futures term structure (double red line) was closer to its historical average
(wide gray line) than any prior year since the launch of VIX futures in 2004,
with the average term structure over the course of the year demonstrating a
relatively modest upward sloping term structure, also known as contango.

[source(s) CBOE, VIX and More]

By way of
explanation, the graphic above shows the average (mean) normalized term
structure for each year since the VIX futures were launched. In normalizing the
data, I have set the average front month VIX futures contract to 100 and have
expressed the averages of the second through seven months as multiples of the
front month. Note that the terms
structure lines are dotted and somewhat wavy for 2004 – 2006, due to the fact
that the CBOE did not implement a full complement of consecutive monthly
futures until October 2006.

In terms of takeaways, since I have not posted
this graphic in two years, note that the term structure for 2015 was slightly
flatter than average. Looking back a
couple more years, note that 2012 and 2013 saw the steepest term structure on
record. In the thirteen-year history of
VIX futures, only two years saw a downward sloping term structure, also known
as backwardation: 2008 and (barely,
depending upon how one measures) 2009.

During the
course of 2016, the VIX futures term structure moved into backwardation on four
separate occasion and closed in backwardation on a total of 37 days – with 31
of those 37 days running consecutively from January 4th to February
16th. These four instances
and 37 days are just slightly below the average year, as can be seen in the
graphic below.

[source(s) CBOE, VIX and More]

Last but not least, the average term structure for the year as well as the
frequency and magnitude of the contango-backwardation dance is a strong determinant of the
annual performance of the VIX ETPs and
in my next post I will detail why 2016 was unlike the previous year, where Every
Single VIX ETP (Long and Short) Lost Money in 2015.

Two days ago, in
The
Year in VIX and Volatility (2016), I made no mention whatsoever of the VIX futuresterm
structure. Traders of the full range
of VIX products (futures, options and ETPs) hopefully know by now that the entire
VIX product landscape is based -- and priced -- off of VIX futures and one of the most important
aspects of VIX futures is the shape of the term structure.

Long story
short: as the graphic below shows, the 2016
VIX futures term structure (double red line) was closer to its historical average
(wide gray line) than any prior year since the launch of VIX futures in 2004,
with the average term structure over the course of the year demonstrating a
relatively modest upward sloping term structure, also known as contango.

[source(s) CBOE, VIX and More]

By way of
explanation, the graphic above shows the average (mean) normalized term
structure for each year since the VIX futures were launched. In normalizing the
data, I have set the average front month VIX futures contract to 100 and have
expressed the averages of the second through seven months as multiples of the
front month. Note that the terms
structure lines are dotted and somewhat wavy for 2004 – 2006, due to the fact
that the CBOE did not implement a full complement of consecutive monthly
futures until October 2006.

In terms of takeaways, since I have not posted
this graphic in two years, note that the term structure for 2015 was slightly
flatter than average. Looking back a
couple more years, note that 2012 and 2013 saw the steepest term structure on
record. In the thirteen-year history of
VIX futures, only two years saw a downward sloping term structure, also known
as backwardation: 2008 and (barely,
depending upon how one measures) 2009.

During the
course of 2016, the VIX futures term structure moved into backwardation on four
separate occasion and closed in backwardation on a total of 37 days – with 31
of those 37 days running consecutively from January 4th to February
16th. These four instances
and 37 days are just slightly below the average year, as can be seen in the
graphic below.

[source(s) CBOE, VIX and More]

Last but not least, the average term structure for the year as well as the
frequency and magnitude of the contango-backwardation dance is a strong determinant of the
annual performance of the VIX ETPs and
in my next post I will detail why 2016 was unlike the previous year, where Every
Single VIX ETP (Long and Short) Lost Money in 2015.

Purpose of this Blog

The intent of this blog is to educate, inform and entertain readers, while also serving as an archived learning laboratory of sorts as I try to sharpen my thinking in areas such as volatility, market sentiment, and technical analysis. I also enjoy charging off on tangents and hope that readers may find some illumination or at least amusement in these forays.

Reviews of VIX and More

About Me

Chief Investment Officer at Luby Asset Management LLC in Tiburon, California. Previously worked as a full-time trader/investor and also a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon.
Useless trivia: I once broke the world pogo stick jumping record without knowing it.